The Spanish Constitutional Court has declared unconstitutional the calculation of the municipal capital gains tax.

What is the municipal capital gains tax?

The Incremento del Valor de los Terrenos de Naturaleza Urbana, also known as municipal capital gains tax (plusvalía municipal), is applied when any property changes hands, that is to say, when a property is sold, inherited or gift. 

In the case of a sale, the seller must assume this municipal tax, while in the inheritance or donations procedures, it is the acquirer who must pay it. 

It has been a relevant ruling as this tax is one of the biggest sources of revenue for local councils, after the IBI local council tax in the first place.

What has ruled the Constitutional Court?

For now, we only have the press note issued on the 26th of October, by the Constitutional Court. 

After several rulings since 2017 that annulled this tax for cases of losses or when there is no increase in value, the Plenary has declared that the method of calculating the tax base is unconstitutional according to Article 31 of the Spanish Constitution, which would entail the definitive liquidation of the tax.

Consequently, the unconstitutionality and nullity of articles 107.1 second paragraph, 107.2.a) and 107.4 of the rewritten text of the Law regulating local finances, approved by Royal Legislative Decree 2/2004, of 5 March, are also declared unconstitutional.

According to the Constitutional Court, the legislator must tax “according to the (real) economic capacity manifested in the taxable event by establishing objective or estimated bases cannot be arbitrary but requires objective and reasonable justification; justification that must be more solid the further the objective method chosen by law is removed from reality”.

Why is it unconstitutional and how is this tax calculated?

Currently, this tax violates the principle of economic capacity, as it taxes a non-existent economic capacity, since in many cases the increase in the value of the property is neither real nor certain. 

This is because the calculation always assumes that there has been an increase in value when the property is transferred, regardless of whether such an increase actually took place.

So far, the capital gains tax has been calculated using the cadastral value from the time of purchase until its transfer, meaning that tax is always payable, regardless of whether a loss was made on the transfer. 

Could a refund be claimed?

Once the full content of this ruling has been published, it will be necessary to assess its effect on self-assessments and settlements of the municipal capital gains tax and on the procedures that are being processed. 

From the press note we know that the ruling will affect all transactions made from now on or those which are still pending resolution in the courts. However, the judgement has two dissenting votes of the Plenary and furthermore, it does not contemplate retroactive effect to be applied on past settlements.

All in all, we await to read the final ruling in order to provide more information, as it could open the door to taxes unduly paid being returned.